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What Happens if You Sell a House Before Paying off the Mortgage?

What's Covered in This Article

In the United States, 5.64 million homes were sold in 2020. While many people are choosing to sell, if you haven’t done it before with a mortgage, it can be a little more confusing than you think.


Buying a home is a big undertaking and requires a lot of time and thought, but so does selling that same home.


If you’re thinking about selling your home, you also have to be considering how that works with a mortgage. After all, most people that invest in real estate have to take out a loan to be able to afford the property.


What happens if you sell a house before paying off the mortgage? Keep reading to find out.


What Is Equity?


To understand selling your home with a mortgage more easily, you first need to know what equity is and why it matters so much in a home sale (or purchase).


Equity is the value that you would earn on your home when you sell, even with paying off loans and covering any other selling expenses.


It can be difficult to determine your equity if you have a home equity loan, a home equity line of credit, or have unpaid liens on the house or property. However, the two main types of equity that make up your home’s whole equity are home investment equity and earned equity. These are where your focus should be when selling.


Home investment equity is what you have gained by owning the home over the years. This includes your down payment, mortgage payments, and upgrades or renovations that make the home worth more now.


Earned equity is the profit from the home that you’ll see upon selling the home and is directly related to the market that you decide to sell in. It will include any changes in your home value related to the market and additional ROI related to changes you’ve made since you purchased the home.


What Happens if You Sell a House Before Paying off the Mortgage?


When you’re selling the home, the ideal scenario would be to have equity available to pay off the balance of the loan, cover any costs related to the sale, and still have profit left at the end. The buyer’s payment will help you pay off the remaining loan balance and cover the closing costs, with you getting the final payout of whatever amount is leftover.


Simply put, if you are are selling a house that still has a mortgage, you will use the funds from the sale to pay off that mortgage and you will hopefully have enough left to cover all other costs as needed.


This is why it’s so important to pay attention to how much equity you have in your home and how much you have left on the mortgage itself before the sale.


Is It a Good Idea to Sell Before the Mortgage Payments Are Done?

While it is more challenging to get a new mortgage when you still have an old one, it’s possible to do it even if you haven’t sold the old home yet. However, it is better to try to sell your old home first to get the best rates. You can easily sell your house before paying off the mortgage, and it’s likely not as uncommon as you may imagine.


If you consider that most mortgages are between 10 to 30 years long, it makes sense that many people don’t always wait 30 years to move to a new house and, as a result, likely haven’t completed their mortgage payments.


When you’re trying to sell your home, the main goal is to gain equity or at least stay at a balanced level. If you’ve lived in the home for enough time to build up that equity, it’s completely acceptable to choose to move to a new house that may have a different mortgage payment.


However, be cautious not to purchase a new home that is more than your current equity or you may end up going upside down on the investment.


What Happens if You Go Upside Down?


If you sell your home and find that you don’t have the equity to pay off the mortgage, the technical term is called having negative equity, but people also refer to it as being upside down or underwater on the loan. To resolve this issue, you’ll need to either bring your own money to cover the excess or you will want to consider a short sale.


If the value of your home has dropped since you bought it, you will likely owe more on the loan than what the home is actually worth. This is part of the risk that is taken when you’re purchasing a property.


A short sale can help if you need to sell the home right away instead of waiting for the market to improve. In this type of sale, the bank will agree to allow the sale of your home for less than you owe. You have to get their permission because this means that they will be agreeing to receive less money than what you had agreed upon when you sell.


While this may sound nice, it’s not the ideal solution because short sales can impact your ability to get a new home in the future. Your credit score will be affected and you’ll be forfeiting your original down payment.


What Are the Best Options for a Fast Home Sale?


Luckily, there are ways to easily sell your home quickly (even without a realtor) so that you won’t have to worry about lenders seeing that debt from the home you no longer want.


You can try to sell your house on your own (“for sale by owner”), which means you’ll list your home on the market without any realtor assistance. While this is a nice way to avoid realtor commissions, it also means you have to take on the responsibility that a realtor would have all on your own.


Another option is to sell your home to someone you know that wants to purchase the home. You’ll need to hire a real estate attorney to help you with the paperwork, but otherwise, you get to avoid real estate fees and sell your home fast. The only issue is that if things don’t go exactly to plan, you may end up negatively influencing your relationship with the person you’re selling to.


The best way to sell your home quickly is to accept a cash offer. These will usually come with fewer strings attached, and you’ll be able to sell your house in “as-is” condition.


At First Choice Home Buyers, we have experience buying homes in the local Harrisburg, PA area for cash. We want to help you sell your home, no matter what situation you’re dealing with or why you’re choosing to sell.


Get a Free Cash Offer Now


What happens if you sell a house before paying off the mortgage? You will be able to use the money from the sale to pay off your mortgage and get a new home as long as your equity is high enough.


Any homeowners in Pennsylvania that want to sell their home in any condition can benefit from selling their home for cash. If you’re ready to sell now, we are ready to speak with you! Get in touch with us today at First Choice Home Buyers and let us help you sell your home fast.

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